This past week, Gamestop stock (GME) surged to 325 USD per share, bringing its total gain to 1625% this year. With today’s advanced technology, the presence of online purchasing has become increasingly more popular; rather than going in store, many consumers opt to order through services such as Amazon. Consequently, many retail stores have started to sink, prompting many hedge funds to short retail stocks such as GME.
Essentially, if someone shorts a stock they are betting that the value of a stock will go down. When shorting, investors will borrow a stock from a broker and sell it back when ideally, it reaches a lower price. If the stock is sold back at a lower price, the investor may keep the leftover money from the original borrow. Shorting stock is a high risk-high reward. Alternatively, if a stock price goes against a short-investor's prediction by rising, the investor will be forced to sell back the stock to the lender at a higher price, resulting in one losing money. Since stock prices can continue to rise, one can see that shorting stocks can result in extreme losses. However, if the stock continues to rise, short investors may also choose to purchase stock in order to mitigate losses (one of the reasons Gamestop stock surged so much).
This past month, one Redditt account, WallStreetBets (WSB), discovered that Melvin Capital Management, a hedge fund, had shorted millions of dollars into Gamestop’s stock. WSB decided to utilize their online platform to persuade users to purchase Gamestop’s stock (≈17 USD), in hopes of increasing stock price which would ultimately hurt these high level investors and help the average man.
With many new investing apps such as Robinhood, an interest free stock trading platform, users from anywhere in the world can purchase stocks rather than limiting it to the wealthiest elite. This movement has become more symbolic, representing democratization of the financial markets. Of course, this recent news has cost some of these hedge funds. In hopes to cut losses, Robinhood has limited stock purchasing of specific stocks (GME, AMC, etc) to one share per account.
Personally, I think this decision from Robinhood is a bit uncalled for. Given that these are public stocks, anyone should be able to invest in however much of the company they desire. In addition, stock investing is always a risk, and these hedge funds should not be able to reap only the benefits, especially at the cost of normal people. Although short stocking can have high reward, I think long-term investing is much safer while also having high benefits if proper approaches are taken. In addition, I think mutual funds such as ETFs are a great way to invest money, while mitigating risk.
What are your thoughts on Robinhood’s decision to restrict/limit public stock purchases? Should it be allowed?
Do you think shorting stocks is worth the risk of losing exponentially more than your initial investment?
https://www.npr.org/2021/01/31/962479849/reddit-wallstreetbets-founder-calls-gamestop-stock-frenzy-a-symbolic-movement
https://www.cnbc.com/2021/01/29/robinhood-is-still-severely-limiting-trading-gamestop-holders-can-only-buy-one-additional-share.html
I would say that it is probably not worth it because you can't predict how the stock or company you invest in will do and you'd risk losing a lot more than just what you invest. But also, it could be worth the risk especially in the right circumstances. If you are confident that the stock you short won't do well then it's probably a good move and an opportunity for great economic gain. But you can never really be sure that something will do so bad, and like in this case, there could be factors outside of the success of the company that can bring it up.
ReplyDeleteRobinhood is a private company. Don't get me wrong, I sincerely hate their backtracking on their mission statement, and I would like to see them uphold the freedom of our markets - however, it should be allowed, because it's a separate corporation. I'm sure the market will decide against the company in the future regardless, as they already have a pretty sweet-looking 1.1 star rating on Google from thousands of annoyed consumers.
ReplyDeleteAs for the question on shorting, it was absolutely worth it (ironically, before this social assault happened - now, it is terrifying to short stocks). Firstly, it isn't necessarily "infinite" losses from shorting because you can still purchase stock quickly if it starts going up. (This is actually one of the factors that caused GameStop stock to skyrocket, because investors were purchasing stock to pull out of their shorting ASAP, before too many losses accumulated - the added demand for stock raised the price, though obviously not everybody was lucky enough to jump out). Secondly, shorting stocks allows large investors (hedge funds, banks, etc.) to bet on a stock going down, which allows for a lot of possibilities. This is especially true considering the idea that a large enough investment into shorting can artificially decrease the stock price; sell enough stocks, and the demand for stock will seemingly go down, lowering the price.
Shorting certainly has its benefits. I agree with your point that shorting is extremely beneficial to larger investors such as hedge funds. Oftentimes hedge funds will short competing funds in efforts to boost their primary fund which definitely benefits. As to shorting for a less experienced person, I think it is important to short with caution, because it is definitely a bit more complex than typical purchasing. Regarding Robinhood, although I understand they are entitled to make decision they did, it is definitely a bit of a step back from their original purpose and mission statement of opening the market to all.
DeleteI would say that Robinhood went too far. One of the main objectives of the app is to provide free trading, but with amount of trades happening the company is losing lots of money. Personally, these actions of closing or hiding stocks are horrible but I do see why they did it. Robinhood allows people to trade stocks for free without any fees and by doing so they lose lots of money. Instead of just having the rich and investors getting involved with the stock market, normal people are able to invest as well. This can create a much more competitive market which more and more people are involved. Most of the time, shorting stocks can be risky and even more now. With more of the public having access to stocks and the economy it can allow for more market manipulation. From this event, it shows how much of the economic market is controlled by Wall Street betting and almost gambling to get even more rich.
ReplyDeletePersonally, I don't think shorting is worth the risk, especially for the average American as it can really work against one's benefit. Also, it seems morally wrong to bet against the rise of the economy. I know stocks doesn't take morale into consideration like at all- but it does seem a bit counterproductive to the economy overall. But on a different note, Robinhood aboslutely made an unfair decision by limiting user's shares. The purpose of their platform is to make investing more accessible and democratize stocks, however, they completely abused their power. While it may be in their legal right to do whatever they want, they have an obligation to both businesses and users alike to promote an even playing field.
ReplyDeleteRobinhood should NOT be restricting their markets. The stock market is highly volatile and the average person has the freedom to invest what they want. Major corporations already have a lot of control in the way they can control the market. This means that the beginning investor starts at a disadvantage. Analysts of these symbols pride themselves in the prediction of trends either following candlestick patterns or simply following the news. Anything can impact these markets and when investors can make an educated guess, they are rewarded. However, with Robinhood blocking certain people from "overbuying"this changes the shift towards major corporations even more. As for shorting stocks, I personally think the risk is worth it. Everything in the stock market is a risk, betting against a company instead of for a company isn't much different. It all comes with research and knowledge, once that happens, there is still risk but a lot less of it. If one knows that a company is going to drop, shorting the stock is a great idea, the flow of currency is still moving.
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ReplyDeleteI think that Robbin hood regardless of if it had the legal right or nor should not shut down consumer's ability to purchase stock. I think morally they have a duty to allow the common people to buy stocks and give an equal oportunitty for all to take part in stock trading. As for shorting I think its fine, If you belive a company is going to fail might as well make some money knowning its a sinking ship. Of course it has its risks but all investments have some kind of risk, shorting included. As for the exponential lost potential I think that the game stop rising to incredible amounts is the cause of this great loss, I think generally failing to short stock isnt as damaging as it apears to be. I think it will be much more interesting to see what will happen next after this including the law suit against robin hood and how that will play out.
ReplyDeleteRight now, it’s unknown whether Robinhood was actually manipulating the market or if they needed to restrict stock purchases for risk management, as they claim. I think that the investigations need to take place first in order to get to the bottom of this. On a different note, Robinhood users were angered with Robinhood and it seemed like Robinhood was at the end of their rope, but with the publicity around this situation, Robinhood actually gained users with increased public awareness of their platform. So, in the long run, this whole situation may be great for Robinhood. As for shorting, I think it might be worth it if you know how to go about shorting well, but if not, I don’t think it’s worth the risk. Personally, I wouldn’t – I know I would lose big. From what I know, I don’t think shorting is that great anyway. Short stocking is essentially gambling based on which direction you think a stock’s price is going to go instead of investing in the actual asset, and the speculation and volatility it creates is not good for the market.
ReplyDeleteI agree that Robinhood’s decision to restrict and limit public stock purchases should not have been allowed. Robinhood was supposed to be a symbol of democratizing the financial markets, however, this move goes against their purpose as an app to allow all users a fair chance in purchasing stocks. There has also been suspicion that Robinhood made this decision in restricting public stock purchases at the behest of their biggest revenue source, Citadel hedge fund. This company is among the Wall Street hedge funds, which have been losing money, due to the purchases from retail investors. If this were to be true, then it tantamounts to insider trading which is illegal. I think for experienced investors, shorting stocks is worth the risk of losing exponentially more than their initial investment. The same, however, cannot be said for novice investors, as the risks outweigh the potential benefits when shorting stocks.
ReplyDeleteWhat Robinhood did went against its founding principles. It advertised itself to be used by the "common man," and it's decision to limit trading only helps the hedge funds. I'll grant Robinhood the benefit of the doubt since they're screwed either way, Robinhood doesn't get out of this alive. Short selling is a gamble, anyone who does it knows the potential risks, and it's no different with these Hedge funds. They rolled the dice and payed the price, that's the free market for ya. Melvin Capitals all in move on GameStop was objectively a terribly risky decision too. The market is a crazy place, and the same rules should apply to the hedge funds and the common man. So if Melvin Capital goes bankrupt ¯\_(ツ)_/¯, sucks to suck no bailout for you.
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